DOL proposal could force choice between confidentiality and compliance

A proposed rule pending in the Department of Labor (DOL) has the legal community in an uproar. The rule would upend 50 years of precedent that generally exempted lawyers from a law requiring those helping employers deal with unions to disclose those client relationships and related fees. Management-side labor lawyers claim the proposed change would create a Hobson’s Choice: risk censure and possible disbarment for violating attorney-client confidentiality, or risk criminal prosecution for failing to file disclosure reports.

The Labor Management Reporting and Disclosure Act (LMRDA), passed in 1959, requires disclosure of fees paid to and services provided by “persuaders,” consultants hired to influence employees not to unionize. Lawyers traditionally have been exempt as long as they didn’t directly communicate with employees, under a provision known as the advice exemption.

“For 50 years, our obligation as attorneys has been pretty well established,” says Steven Bernstein, a Fisher & Phillips partner. “The understanding is that so long as we don’t deal directly with employees who are called on to decide on representation, fees are exempted from disclosure under the advice exemption.”

But labor unions have worked for years to change that, nearly succeeding when the outgoing Clinton administration proposed a rule, only to have it immediately rescinded by the Bush White House. In 2011, the Obama administration revived the idea. The proposed rule changes the advice exemption so any lawyer who drafts, revises or provides a persuasive employee communication for a client could be deemed a persuader, even if he has no direct contact with employees.

“Almost any activity undertaken by counsel whose end result is persuasion is now reportable,” Bernstein says.

The burden falls on in-house counsel too, because the rule would require employers who consult law firms on labor matters to report to the government the nature of the relationship with the firm, the fees paid and the category in which the advice falls. Outside counsel would have the same obligation, according to Littler Mendelson Shareholder Michael Lotito.

“This rule would limit the ability of employers to obtain legal counsel during union organizing, essentially chilling the company’s ability to communicate effectively with its employees about unionization without fear of violating the law,” Lotito says.

‘Intrusive Burden’

After the Department of Labor (DOL) issued the Notice of Proposed Rulemaking in July 2011, approximately 7,000 law firms, associations representing lawyers, companies and other interested parties filed comments. The American Bar Association protested the rule as a violation of attorney-client privilege, saying it imposes “an unjustified and intrusive burden on lawyers and law firms and their clients.” The Association of Corporate Counsel urged the DOL “to resist undermining the attorney-client relationship.”

The proposed rule also would greatly expand the reach of the LMRDA, traditionally limited to union organizing and bargaining matters, to include work involving questions of “protected concerted activity” under the National Labor Relations Act. Under the proposed rule, a lawyer who revises an employee handbook or drafts a social media policy could be deemed a persuader.

If a law firm provides “persuader” services to a single client, it would be required to disclose fees received and services provided to every client that received any type of labor and employment services—not only persuasive services—during that calendar year. Failure to file the required forms puts the employer and the law firm at risk for criminal penalties including a jail sentence and a fine of $10,000.

Rule Delayed

The DOL signaled in January that it would send the persuader rule to the Office of Management and Budget (OMB) for review by the end of April. But that date came and went with no action. Speculation is that the administration didn’t want to further complicate the already contentious confirmation process for its proposed Secretary of Labor, Thomas Perez, Lotito says.

“That suggests that once a Labor Secretary is confirmed, that is the last impediment to moving the proposal to the OMB,” he adds.

Early in Perez’s confirmation process, he replied to questions about how he would handle the persuader proposal (see “Perez’s Position”). While he promised to study the issue and consult with interested parties, few labor experts think he will hold back the persuader rule.

Because legal challenges have stymied administration efforts to advance pro-union policies through the National Labor Relations Board (NLRB), “one of the last concrete things the administration can do for labor is to give them the persuader rule,” Lotito says.

“If law firms can no longer provide advice without reporting, smaller employers will no longer have access to outside counsel, and they don’t have in-house counsel with labor relations expertise,” says Harold Coxson, an Ogletree Deakins shareholder. Without expert advice, he says, they may inadvertently commit an unfair labor practice that could result in an NLRB order to recognize and bargain with the union, even without an election.

But Coxson adds that larger companies with in-house labor expertise will suffer, too.

“In many cases they would suffer loss of advice from outside law firms in areas people have not anticipated,” he says. For example, he cites a company seeking a site selection plan for a new facility. “If the reason for the site selection review is related to the labor climate, that could be persuader activity,” he says.